SunTrust Affiliates Fined $5 Million by FINRA for Auction Rate Securities Violations
Yoomi Lee | Bloomberg Law
FINRA News Release, FINRA Fines Sun Trust Robinson Humphrey, Sun Trust Investment Services a Total of $5 Million for Auction Rate Securities Violations (July 26, 2011); FINRA Letter of Acceptance, Waiver and Consent No. 2008016036101 (June 29, 2011); FINRA Letter of Acceptance, Waiver and Consent No. 2008013864101 (June 29, 2011)
The Financial Industry Regulatory Authority (FINRA) announced that registered broker-dealers, SunTrust Robinson Humphrey, Inc. (SunTrust RH) and SunTrust Investment Services, Inc. (SunTrust SI and together, Respondents) submitted a Letter of Acceptance, Waiver and Consent to settle charges in connection with auction rate securities (ARS) violations. Without admitting or denying the findings, SunTrust RH and SunTrust SI were censured and consented to pay $4.6 million and $400,000 in fines, respectively. In determining the appropriate sanctions, FINRA took into consideration Respondents’ remedial efforts, including, (1) completing the voluntary repurchase of the ARS from certain customers, and (2) agreeing to participate in a special arbitration program administered by FINRA for eligible investors to resolve claims for consequential damages.
SunTrust RH’s Misconduct
In the summer of 2007, SunTrust RH became aware of the unstable ARS market, FINRA claimed. Nevertheless, SunTrust RH allegedly violated NASD Rule 2110 and MSRB Rule G-17 by failing to adequately disclose to its sales representatives its concerns regarding whether it could continue to support its municipal ARS issues. Moreover, SunTrust RH allegedly encouraged its sales representatives to sell ARS so that the firm could reduce its inventory. As a result, certain sales representatives continued to market and sell such ARS as safe and liquid.
Additionally, SunTrust RH purportedly shared material non-public information regarding the potential refinancing of certain ARS issues with SunTrust Bank, Inc. (Bank) in violation of MSRB Rule G-17. Specifically, the Bank allegedly was exploring investing in SunTrust RH-issued ARS as an arms-length investor for its investment portfolio, and SunTrust RH negligently included certain material information that was not publicly available to other investors. As a result, SunTrust RH breached the policies and procedures that were in place to limit or contain the flow of material non-public information between it and its affiliates.
FINRA further alleged that SunTrust RH used advertising and marketing materials that were not “fair and balanced” in violation of NASD Rules 2210, 2211, and 2110, and MSRB Rule G-21. In particular, the materials allegedly failed to adequately disclose the risks associated with ARS, including the risk that ARS auctions could fail, making the investment illiquid for a significant amount of time. SunTrust RH also purportedly made misleading comparisons between ARS and other materially different investments in its advertising materials.
Finally, according to FINRA, SunTrust RH failed to establish and maintain adequate supervisory procedures that were reasonably designed to ensure that it marketed and sold ARS in compliance with federal securities laws and applicable NASD and MSRB rules. As a result, the firm was charged for violating NASD Rules 3010 and 2110, and MSRB Rule G-27.
SunTrust SI’s Misconduct
According to FINRA, SunTrust SI primarily sold municipal bond ARS underwritten by SunTrust RH, among others types of ARS. FINRA alleged that from May 2006 through February 2008, SunTrust SI used advertising and market materials for ARS that were not fair and balanced. Specifically, the materials did not provide investors with adequate information so that they could evaluate their purchase, and it did not include risks associated with ARS. As a result, FINRA charged SunTrust SI with violating NASD Rules 2210, 2211, and 2110, and MSRB Rule G-21. FINRA alleged also that SunTrust SI failed to establish and maintain a supervisory system that was reasonably designed to comply with NASD and MSRB rules in the marketing and sale of ARS in violation of NASD Rules 2210, 2211, 3010, and 2110, and MSRB Rules G-21 and G-27. In particular, SunTrust SI purportedly failed to maintain policies and procedures that were reasonably designed to ensure that its sales representatives accurately described the risks associated with ARS to its customers.
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